Taxes and Second Homes
Allocating Property Taxes
Property taxes should be allocated based on percentage of ownership. If one owner sells their share, the property value will likely be reassessed resulting in a higher tax burden. The new owner should be allocated the entirety of the tax increase. Existing owners should not incur a higher tax burden because one owner decides to sell.
Tax Treatment on Second or Vacation Homes
The tax treatment on a second home depends on the degree to which the property is used for personal use versus as a rental.
Pure Second Home Tax Treatment: To qualify for mortgage and property tax deductions, the property can not be a rental for more than 14 days per tax year. Rent income is considered tax free and expenses are not deductible.
Pure Rental Property Tax Treatment: To qualify the property must be a rental for more than 14 days per tax year and the total number of owner use days is 14 or less or l0% or less of the total rental days. Expenses are divided proportionally between personal and rental use. The personal expenses, aside from mortgage interest, are not deductible. The rental expenses are deductible only if they result in losses.
Hybrid Tax Treatment: This occurs of you qualify for neither pure second home or pure rental. A hybrid tax treatment applies almost exactly like a pure rental tax treatment except rental expenses CAN offset income.
Determining Types of Use - Is it Personal Use or Rental?
Co-owner uses the property
Co-Owner pays usage fee
Relative of co-owner uses property (rent or no rent)
Home swap or exchange with co-owner
Any day the home is being used in exchange for payment
All this said, in practice the record keeping of all this usage can be impractical and overly burdensome to the average second home owner. It is advisable that anyone entering into a second home co-ownership with the intent of earning rental income solicit the counsel of a qualified tax attorney.